European Debt Risk Heads For Biggest Weekly Drop Since September

By Katie Linsell -
Nov 23, 2012

The cost of insuring European debt
against default is heading for the biggest weekly drop since
September amid optimism European leaders will let Greece get its
next aid installment and on new signs of economic recovery.

Euro-area finance ministers are meeting on Nov. 26 to
discuss unlocking funds for Greece, after failing to reach an
agreement on Nov. 21. Credit markets were buoyed as a report
showing an unexpected rise in German business confidence added
to data this week from the U.S. and China signaling the world’s
largest economies are recovering.

“The concerns over the Greek situation appear to have
receded somewhat, despite the fact they have yet to actually
reach firm agreement,” said Brian Barry, an analyst at Investec
Bank Plc in London. Demand for corporate debt has remained
relatively strong, “although at this stage we are getting
closer to the end of year issuance window,” he said.

Danone (BN) SA, the Paris-based yogurt maker, and truckmaker
Volvo AB were among companies, banks and agencies that took
advantage of record-low borrowing costs to sell bonds this week.
The yield on European corporate debt has dropped 220 basis
points to 2.2 percent this year, according to Bank of America
Merrill Lynch’s EMU Corporates Index.

Swap Drop

The Markit iTraxx Europe Index of 125 companies with
investment-grade ratings declined 13 basis points this week to
124, the biggest drop since September. The measure rose one
basis point today as of 11:40 a.m. in London.

The Markit iTraxx SovX Western Europe Index of credit-
default swaps on 14 governments fell five basis points this week
to 114. A fall in credit-default swaps signals improved
perceptions of credit quality.

The Markit iTraxx Financial Index linked to the senior debt
of 25 banks and insurers declined 21 basis points this week to
165 and the subordinated measure dropped 31 basis points to 288.

A basis point on a credit-default swap protecting 10
million euros of debt from default for five years is equivalent
to 1,000 euros a year. Swaps pay the buyer face value in
exchange for the underlying securities or the cash equivalent
should a borrower fail to adhere to its debt agreements.